Total Money Market Fund assets (from Invest Co Inst) declined $5.8bn to $2.872
TN. In the first 17 weeks of the year, money fund assets have dropped $421bn,
with a one-year decline of $926bn, or 24.4%.

Total Commercial Paper outstanding jumped $32.9bn last week to $1.109 TN.
CP has declined $61.4bn, or 16% annualized, year-to-date, and was down $314bn
from a year ago (22%).

International reserve assets (excluding gold) - as tallied by Bloomberg's
Alex Tanzi - were up $1.260 TN y-o-y, or 18.9%, to a record $7.925 TN.

April 28 - Financial Times: "Greece will need financial assistance amounting
to between €100-120bn over the next three years, German parliamentarians
claimed on Wednesday after meeting Dominique Strauss-Kahn, managing director
of the International Monetary Fund, and Jean-Claude Trichet, president of the
European Central Bank. They said that the euro 45bn currently proposed as a
rescue package of loans from the IMF and other members of the eurozone was
only enough for the first year of support."

April 28 - Bloomberg (John Glover): "Holders of Greek bonds may lose as much
as 200 billion euros ($265bn) should the government default, according to Standard & Poor's.
The ratings firm yesterday cut Greece three steps to BB+, or below investment
grade, and said bondholders may recover only 30% to 50% of their investments
if the nation fails to make debt payments... The downgrade to junk status led
investors to dump Greece's bonds, driving yields on two-year notes above 25%...
from 4.6% a month ago..."

April 28 - Bloomberg (Niklas Magnusson): "Greek banks... may face further
declines after Standard & Poor's cut their credit ratings to junk on concern
over Greece's funding crisis. National Bank of Greece SA, the largest Greek
lender, fell 10% in Athens trading before the cut was announced yesterday,
bringing the slide this year to 45%...

April 28 - Financial Times (Chris Giles): "The crisis in Greece serves as
a warning to other countries not to lose control of their fiscal positions
and the confidence of markets. But advanced countries have now stretched their
public budgets so far that investors, economists and international organisations
are getting worried. Returning to form, the International Monetary Fund warned
this month that reducing budget deficits, 'should precede the normalization
of monetary policy' in many economies and that they 'need to make more progress
in developing and communicating credible medium term fiscal adjustment strategies'.
Willem Buiter, chief economist of Citi, uses rather blunter language. 'Today's
'best of breed' may be the same dog that yesterday was fit only for the World's
Ugliest Dog Contest - an indicator of just how far the fiscal conditions in
most advanced industrial countries have deteriorated,' he says. The problem
is simple. Huge budget deficits resulting from the financial crisis have put
public debt on an unsustainable trajectory and doubts are growing that the
political will exists for the nasty medicine to be swallowed."

April 30 - Bloomberg (Peter Woodifield and Rodney Jefferson): "Mounting government
debt may weigh on stocks and bonds in the U.S., the U.K. and other parts of
Europe for as long as a decade and result in a 'dull' outlook for some markets,
according to two Edinburgh fund managers. Almost $1 trillion was wiped off
the value of stocks on April 27 on concern that debt will spur defaults and
derail the global economy... 'It is going to change relative returns for the
next 10 years,' Gerald Smith, deputy chief investment officer of Baillie Gifford & Co.,
said in an interview at his office in the Scottish capital"

April 28 - Bloomberg (Emma Ross-Thomas): "Spain had its credit rating cut
one step by Standard & Poor's to AA, putting it on a par with Slovenia,
as contagion from Greece's debt crisis spreads through the euro region. S&P
said...its outlook on Spain is negative, indicating possible further downgrade..."

April 30 - Bloomberg (Katrina Nicholas): "Volatility indexes show Europe's
fiscal crisis is jolting markets in Asia's largest economies, with gauges in
China and India jumping as much as in the U.K."

April 30 - Bloomberg (Louisa Fahy): "Ireland could skip 'a couple' of monthly
bond auctions amid concerns that the mounting fiscal crisis in Greece will
spread to other euro-area nations, the head of funding at the country's debt
agency said."

Global Government Finance Bubble Watch:

April 27 - Bloomberg (Christopher Palmeri and Michael M. Marois): "Hawaii
Governor Linda Lingle said citizens must act to stop the increase in government-pension
benefits or risk letting the expanding liabilities hinder future economic growth.
'Until the public rises up and says, 'Enough is enough, you have to stop this
spending,' it won't stop, and our quality of life will degrade,' Lingle, 56,
said...

Currency Watch:

April 30 - Bloomberg (Klaus Wille and Matthias Wabl): "Swiss officials are
making decisions their peers in Greece or Portugal envy: Canceling bond sales
as a budget surplus reduces the nation's borrowing needs... Switzerland called
off bond sales in November and December, saying it didn't need additional funds
to finance the budget."

The dollar index rose 0.6% this week to 81.88 (up 5.2% y-t-d). For the week
on the upside, the New Zealand dollar increased 1.4%, the Brazilian real 1.0%,
the South African rand 0.4%, and the Japanese yen 0.1%. For the week on the
downside, the Canadian dollar declined 1.9%, the Swedish krona 1.2%, the Mexican
peso 1.1%, the euro 0.7%, the British pound 0.7%, the Swiss franc 0.4%, and
the Australian dollar 0.4%.

April 28 - Bloomberg: "China is 'less and less likely 'to raise interest rates
this quarter after Greece's debt-rating downgrade highlighted the fragility
of the global recovery, Bank of America-Merrill Lynch said... 'What happened
in Greece and other European countries could convince Chinese policymakers
that it's still too early to hike rates," Hong Kong-based economist Lu Ting
said."

Japan Watch:

April 30 - Bloomberg (Mayumi Otsuma): "The Bank of Japan pledged to help lenders
provide credit after reports showed the economic recovery isn't yet strong
enough to overcome deflation. Governor Masaaki Shirakawa said the bank will
explore steps similar to those undertaken in 1998-1999, when it increased credit
to lenders to funnel cash to companies amid a credit squeeze.

Asia Bubble Watch:

April 29 - Bloomberg (Shamim Adam and Sophie Leung): "Asia's economic recovery
that's outpacing the rest of the world is attracting capital inflows that may
cause the region to overheat and lead to the formation of asset bubbles, the
International Monetary Fund said. Expectations of Asian exchange-rate appreciation
may be boosting carry trade flows, where investors borrow cheaply in one currency
and use the funds to invest in others... The World Bank predicts as much as
$800 billion in global capital flows this year, compared with about an annualized
$450 billion to developing economies in the second half of 2009..."

April 27 - Bloomberg (Alexander Ragir): "Brazil's economy will grow 6.4% to
7% this year as the country's output gets 'close to overheating,' said Octavio
de Barros, chief economist at Banco Bradesco SA."

April 29 - Bloomberg (Iuri Dantas): "Brazilian outstanding bank lending expanded
16.8% in March from the same month a year earlier, the central bank said."

April 30 - Bloomberg (Adriana Brasileiro): "Adriana Pires, a human resources
manager in Rio de Janeiro, had a pleasant surprise when she prepared her income
taxes: the 8,000 reais ($4,575) she paid for breast implants and liposuction
are tax-deductible. As Brazilians race to meet today's filing deadline, the
federal government for this year for the first time will allow taxpayers to
deduct the cost of boob jobs, tummy tucks and any other type of cosmetic surgery.
The measure, retroactive to procedures performed since 2004, may spur the 3
billion reais plastic surgery market, the world's second-largest after the
U.S...."

April 27 - Bloomberg (Ye Xie and Camila Fontana): "Brazilian policy makers
are poised to raise borrowing costs at the fastest pace since President Luiz
Inacio Lula da Silva took office in 2003 after central bank chief Henrique
Meirelles pledged 'vigorous action' on inflation... The biggest two-day surge
in six months on yields of the overnight interest rate futures contract due
in July reflects expectations that Meirelles will raise the benchmark Selic
rate 2.25 percentage points to 11% by the June policy meeting..."

Unbalanced Global Economy Watch:

April 29 - Bloomberg (Simone Meier): "European confidence in the economic
outlook improved to the highest in more than two years... amid signs the euro-area
recovery is strengthening even as Greece's fiscal crisis spreads across the
region."

April 29 - Bloomberg (Patrick Donahue and Frances Robinson): "German unemployment
fell at the fastest pace in more than two years in April as Europe's largest
economy shrugged off the coldest winter in 14 years and a worsening fiscal
crisis in the euro region's periphery... The jobless rate fell to 7.8% from
8%."

April 29 - Bloomberg (Jody Shenn): "Decisions by homeowners to walk away from
mortgages they can afford are accounting for more defaults, according to Morgan
Stanley. About 12% of all mortgage defaults in February were 'strategic,' up
from about 4% in the middle of 2007... analysts led by Vishwanath Tirupattur
wrote..."

April 29 - Bloomberg (Brian Faler): "Since the U.S. recession began in December
2007, Congress has extended the duration of weekly unemployment benefits for
the jobless three times. Now, the lawmakers may have reached their limit. They
are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands
of Americans have already reached. In coming months, the number of those who
will receive their final government check is projected to top 1 million."

April 28 - Bloomberg (Jeff Green): "U.S. manufacturers will fill fewer than
30% of 2 million lost factory jobs as the economy recovers over the next six
years, according to an estimate from an industry trade group. Most of the hiring
will come in 2011 and 2012, David Huether, chief economist for the National
Association of Manufacturers, said..."

April 28 - Bloomberg (Rebecca Christie): "The financial crisis and recession
cost U.S. households an average of about $100,000 in lost wealth and income,
according to a study by former Treasury Department economist Phillip Swagel.
From September 2008 through the end of 2009, households' stock holdings fell
$66,000 and real estate dropped $30,000, according to... the Pew Economic Policy
Group."

Real Estate Watch:

April 28 - Bloomberg (Dan Levy and Daniel Taub): "The U.S. housing market
won't recover for three to five years as mounting foreclosures hold down prices,
according to mortgage-bond pioneer Lewis Ranieri. 'There's another big leg
down and the question is how long does it stay,' Ranieri...said... 'You can't
have much of a rally when you've got this big overhang.' Home foreclosures
probably will reach a record this year with more than 1 million properties
seized by banks, according to data seller RealtyTrac Inc."

Central Bank Watch:

April 29 - Bloomberg (Andre Soliani and Iuri Dantas): "Brazil's central bank
became the first in Latin America to increase borrowing costs in more than
a year...In a unanimous vote yesterday, the bank board raised the Selic rate
to 9.5% from a record 8.75%."

Fiscal Watch:

April 28 - Bloomberg (William Selway): "The agency financing construction
of the new San Francisco-Oakland Bay Bridge may sell as much as $4 billion
of bonds this year to take advantage of federal debt subsidies before they're
scaled back or expire."

Muni Watch:

April 28 - Financial Times (Nicole Bullock): "Council meetings in Harrisburg,
the capital of Pennsylvania, have weighed issues ranging from snow removal
and rubbish collection to a rise in dog fighting, but a meeting this week was
particularly unusual. In a sign of the tough times, officials called in experts
to discuss the pros and cons of going bankrupt. 'There is no good option,'
Dan Miller, Harrisburg city controller, told the city's administration committee.
Mr Miller and some members of the committee advocated exploring bankruptcy
as way to get out from under its debts... Bankruptcy has never been used widely
by municipal authorities, so they have few guidelines. But with cities, towns
and counties across the US hard hit by the recession, local officials, investors
and analysts are questioning whether bankruptcy could become more common. The
debate stretches from city halls to Wall Street, and the Securities Industry
and Financial Markets Association (Sifma) will have its own public airing on
the topic at a conference on Thursday in Manhattan."

Speculation Watch:'

April 30 - Bloomberg (Garfield Reynolds and Khalid Qayum): "Emerging-market
bond funds have had their three best weeks on record this month, taking in
more than $5 billion... EPFR Global said."

April 29 - Bloomberg (Kristen Haunss): "BlackRock Inc., the world's largest
asset manager, and Blackstone Group LP's GSO Capital Partners LP are forming
mutual funds to invest in loans... The firms have joined Goldman Sachs Group
Inc. in announcing funds investing in leveraged loans pegged to short- term
interest rates. Investors poured more than $2.5 billion into bank-loan mutual
funds in March and the first three weeks of April, more than triple the amount
for March and April last year, according to Lipper..."

April 30 - Bloomberg (Ben Moshinsky): "High-frequency trading faces a European
Union clampdown, as regulators investigate whether traders could use the practice
to manipulate financial markets. The European Commission, the EU's executive
arm, said it's summoning hedge funds and banks for fact-finding talks on the
practice, as it considers stricter rules on market abuse due before the end
of the year."

Tuesday April 27, 2010

My secular bearish view is premised on the Serial Bubble Thesis: the current
backdrop is the product of more than two decades of ever-expanding Bubbles
and increasingly expansive government reflationary measures. Post-Wall Street/mortgage
finance Bubble reflation is fomenting the current Bubble, which I have coined
the "global government finance Bubble." It's a Bubble built on the most fragile
underpinnings.

This week I found myself pondering parallels between two historic Bubbles.

May 24, 2006 - Washington Post (Kathleen Day): "Fannie Mae engaged in 'extensive
financial fraud' over six years by doctoring earnings so executives could collect
hundreds of millions of dollars in bonuses, federal officials said... in a
report that portrayed a company determined to play by its own rules... The
result was a company whose managers engaged in one questionable maneuver after
another, including two transactions with investment banking firm Goldman Sachs
Group Inc. that improperly pushed $107 million of Fannie Mae earnings into
future years. The aim, OFHEO said, was always the same: To shape the company's
books, not in response to accepted accounting rules but in a way that made
it appear that the company had reached earnings targets, thus triggering the
maximum possible payout for executives... The settlement closes regulators'
civil probe into Fannie Mae's accounting scandal, the result of the company's
misstating earnings by about $10.6 billion from 1998 through 2004.

The great crisis of 2008's die had been cast back in 2006. With the scope
of the accounting fraud having finally awoken Congress, Fannie and Freddie
asset growth had been effectively reigned in. Momentously for the marketplace,
intense regulator scrutiny would ensure that the GSEs no longer retained the
capacity to provide the leveraged players (and others) their coveted "backstop
bid" - a powerful mechanisms that had underpinned an increasingly speculative
marketplace through a series of crises and bouts of illiquidity. Yet, throughout
2006 marketplace liquidity remained abundant, confidence ran very high, and
fundamentals appeared sound. Certainly, no one was in the mood to contemplate
that a historic Bubble had turned acutely susceptible to the next serious bout
of market tumult.

The GSEs had for years acted as steadfast financiers for the mortgage marketplace.
They provided the linchpin for the entire system of mortgage risk intermediation;
their activities were instrumental to market pricing distortions and the unleashing
of the historic Wall Street/mortgage finance Bubble. By 2006, dynamics fundamental
to the mortgage market had changed - and yet the market didn't care. Home prices
were rising rapidly, and mortgage Credit was on its way it way to another stunning
year of growth ($1.4 TN). Post-tech Bubble reflation was in overdrive. And
with total mortgage Credit having almost doubled in just six years, the Wall
Street/mortgage finance Bubble was inebriated by "terminal phase" excess.

Interestingly, the overheated mortgage market didn't need the GSEs in 2006.
Instead, the key dynamic was an over-liquefied and speculative marketplace
feverishly chasing yield. Short-term interest-rates were too low, and "private-label" mortgages
were all the rage. Collateralized debt obligation (CDO) issuance was said to
have surpassed $1.0 TN, with rapid growth in the fancy new "synthetic CDO." A
wall of finance was flowing into (and out of) the mortgage arena that was gladly
borrowed by millions with visions of making some easy money of their own. With
finance flowing so loosely, the last thing anyone worried about was the mispricing
of finance or the ramifications from GSE fraud.

Actually, I have my own theory on how malfeasance at the GSEs actually contributed
to late-cycle "terminal phase" mortgage excess. Fed funds began 2006 at only
4.25%, a ridiculously low rate considering the scope of mortgage Credit growth
and asset price inflation. I believe Chairman Greenspan was keenly aware of
GSE-related fragility and this was an important factor in the decision to maintain
loose monetary policy. He was content to see monetary policy entice homebuyers
into adjustable-rate mortgages - thus transferring interest-rate risk from
the GSEs and financial sector to the household sector.

Loose monetary policy was also instrumental in spurring rapid growth in higher-yielding
asset-backed securities and derivatives more generally. This dynamic reduced
system dependency to GSE Credit, while also seemingly shifting mortgage and
interest-rate risk away from the GSEs and the banking system. I believe policymakers
appreciated that there were problematic mortgage excesses; they just mistakenly
envisaged overriding systemic benefits from low rates and the rapid expansion
in securitized mortgage Credit. Perhaps it was with the best of intentions.
But the end result was a policy-induced absolute mess in the pricing and distribution
of finance throughout the entire system.

From my analytical perspective, the system has found its way into another "terminal
phase" of excess - this time emanating from the Global Government Finance Bubble.
Intoxicated yet again by the effects of loose "money," the bulls see inflating
markets confirming sound system underpinnings. I, in contrast, see another
policy-induced absolute mess in the pricing and distribution of finance throughout
the entire system. As always, calling the timing of a Bubble's demise is a
perilous proposition. But I can sure see the makings of acute systemic fragilities.

I'll date the beginning of the end for the Wall Street/mortgage finance Bubble
on June 7, 2007. While subprime problems had been festering for months, that
was the day Bear Stearns announced that two of its mortgage derivatives funds
would no longer allow redemptions. From that moment on, speculative finance
was on it way out of the mortgage sector. I would not be surprised if Tuesday
April 27, 2010 marked an important inflection point for the Global Government
Finance Bubble. The stock market was able to muddle through more than a year
of mortgage market tumult before succumbing to an all-out crisis. So, marketplace
complacency in the face of expanding crises in European debt markets and Wall
Street risk intermediation is not all that surprising.

Greek debt contagion took a dramatic turn for the worst. Two-year Portuguese
government yields jumped 104 bps Monday to 3.97% and then spiked above 5% in
Tuesday's rapidly escalating market dislocation. After beginning the month
at 1.58%, Portugal's two-year government yields Wednesday traded as high as
5.93%. At the worst of the week's dislocation, Portuguese Credit default protection
jumped to 450 bps, after starting April at 144 bps. Ireland's two-year government
yields surged as high as 4.28%, up from last Friday's 2.34%. Yields in Spain
jumped above 2.3%, after ending last week at 1.70%. Italian two-year yields
also jumped as much at 50 bps from Friday's level to approach 2.0%. It is certainly
worth mentioning that Greek two-year yields rose above 18% Wednesday, before
ending the week at 12.67% (after beginning the year at 4%).

And most will argue, perhaps even persuasively, that European debt market
tumult will have little impact on our market and economic recoveries. Readers
surely remember how the U.S. economic expansion was supposed to be immune to
subprime woes. But fragility is inherent to Bubbles, and contagion is fundamental
to Bubble risk. It is the nature of things that the weakest link tends to be
the first to succumb. And as confidence falters, previous risk misperceptions
are comprehended and complacency is abandoned - greed morphs to fear and the
dominoes begin to tumble. I don't know how much or for how long it might take
for contagion to find its way to U.S. debt markets. I am, however, confident
that we face enormous structural debt issues that the markets won't disregard
forever.

The Goldman fiasco does not inspire confidence. Tuesday April, 27 was not
a good day for Goldman, proprietary trading, the OTC derivatives marketplace
or private-sector risk intermediation. It definitely marked an inflection point
for efforts to impose greater regulatory restraint upon the financial sector.
The old ways may have persevered through the LTCM, Enron, GSE and mortgage
fiascos, but today's intense scrutiny of Goldman Sachs will alter the manner
in which Wall Street goes about its business. The near-term ramifications for
our government-dominated Credit system and economy are anything but clear.
There days financial conditions are loose, confidence is high, market liquidity
remains overabundant, and there is little difficulty intermediating risky Credit.
But there is, at the same time, Bubble fragility unrecognized in an overconfident
marketplace.

Reigning in Wall Street proprietary trading desks and derivatives operations
pose major additional challenges for an already challenged private-sector Credit
mechanism. The Street's new realities will make it more difficult for private-sector
Credit to anytime soon supplant Washington's Credit juggernaut. From my perspective,
this equates to massive deficits - for bigger and longer. This means, at some
point, greater market risk to a change in market perceptions and a surprising
jump in yields. And I would argue that Goldman and Wall Street's problems ensure
that the markets for risk intermediation - interest-rate, Credit, equities,
currency, etc. - become less liquid and more vulnerable to dislocation.

Perhaps it doesn't matter all that much for now, but the dislocation that
unfolded in European Credit default swap markets on Tuesday April, 27, 2010
portend serious issues for sovereign debt markets both abroad and at home.
There's hope that European policymakers and the IMF can come up this weekend
with a credible plan for Greek aid. I would tend to believe that the "genie
is out the bottle" and that global markets are in the early stage of adjusting
to new uncertainties and risk realities. Many that have planned on using derivatives
markets to hedge future market risks may begin to reevaluate their approach
to risk taking and management.